Becoming a landlord: A beginners Guide with The Mortgage Clinic

Whether you find yourself becoming a landlord by accident or as a purposeful investor in the property market we here at The Mortgage Clinic have put together this guide. There are many factors to consider and be aware of, and the investment property market has had a shake up in the last tax year with changes to stamp duty charges by the UK government which give cause for deeper consideration when purchasing an investment property. We have also seen changes to affordability calculations from Buy to Let mortgage lenders which have also changed the game for investors.

New stamp duty tax changes for purchases

Stamp duty is a tax on property purchases and in April 2016 the UK government increased these charges on second and subsequent property purchases and the following levels came into effect last year

Property Purchase price

Stamp Duty Rate

Buy to Let Rate

£0 – £125,000

0%

3%

£125,001 – £250,000

2%

5%

£250,001 – £925,000

5%

8%

£925,001 – £1.5 million

10%

13%

So purchasing an investment property of £150,000 would have a stamp duty charge of £5000 which needs factored into your budget, along with your solicitor costs, deposit, letting fees, and any planned work getting your property ready for tenants.

Purchasing with a Buy to Let mortgage

Most property purchases are financed by way of a mortgage and recent changes to lending criteria are highlighted in the main points below:

A larger deposit will be required, typically a minimum of 25%.

Rental income must be enough to cover the mortgage payments and some costs. It is likely you will need a monthly rental amount of at least 125-145% of the mortgage payment.

Fees on a Buy to Let mortgage can be higher than a Residential mortgage

Personal affordability, other mortgages and expenditure are all taken into account not just whether the rental return is enough to cover the mortgage payments

Using an estate agent obviously has its advantages when it comes to finding suitable tenants and even managing the property for you. They will also arrange assured shorthold tenancy agreements, collect rent, chase up rental arrears, organise repairs, and hold tenants deposits. This all however comes at a cost and if you choose to use an estate agent then the costs need factored into your investment return. The alternative is to try and advertise for your own tenants, handle all of the paperwork, repairs, and rent collection yourself. This is not for the faint hearted and can be very stressful and time consuming, speaking from my own experiences as a landlord as I chose to go it alone! This can consume more time than you would estimate, but of course this depends on the tenants, and the state of repair of your property, you could get it lucky!

Measuring return on investment

What do you measure as return on investment? Rental return over costs, Or Property value increases? We all know the mistakes of the past investing in property can be painful if you are simply relying on the property increasing in value over time for your profit. We had a very deep property crash back in 2007 and those relying on this measure have found themselves in negative equity. Our advice is to stick to rental return over costs, an increase in property price should be viewed as a nice bonus that should not be banked upon.

Insuring your property

It is also prudent to insure your investment, and if you purchase with the help of mortgage lending you must have insurance in place for your building. Landlord insurance is different from a residential household policy. Although the buildings cover is essentially the same you may only wish to cover some basic contents, and damage by tenants will generally be excluded. As a tenanted property however, it is a good idea to include additional benefits such as Rent Guarantee Cover, Malicious Damage cover, Legal Expenses and Eviction of Squatters Cover.

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